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In a way, uncertainty isn’t a bad thing. Companies shouldn’t be guaranteed market share or customer loyalty. Not knowing when a disruptive competitor might create a some killer new product or service helps keep private-sector management on its toes — and innovative. Or should. “Only the paranoid survive,” as former Intel CEO Andy Grove famously put it.
But uncertainty about government is another matter. As James Madison wrote in The Federalist #62:
Great injury results from an unstable government. The want of confidence in the public councils damps every useful undertaking, the success and profit of which may depend on a continuance of existing arrangements. What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not but that his plans may be rendered unlawful before they can be executed? … In a word, no great improvement or laudable enterprise can go forward which requires the auspices of a steady system of national policy.
And now we have the data to help prove correct Madison’s intuition. Macroeconomic Advisers finds that since late 2009, uncertainty created by America’s crisis-driven fiscal policy has a) raised the Baa corporate bond spread by 38 basis points, b) lowered GDP growth by 0.3 percentage points per year, and c) raised the unemployment rate in 2013 by 0.6 percentage points, equivalent to 900,000 lost jobs. MA: ” … by undermining wealth and raising private borrowing costs, fiscal policy uncertainty can indirectly undermine household spending as well as business hiring and investment.”
This analysis is based on the work of economists Scott Baker, Nicholas Bloom, and Steven Davis who created an index of policy uncertainty, finding that “high levels of policy uncertainty foreshadow lower levels of output, investment, and employment.” (Along those lines, new research from Harvard’s Daniel Shoag and AEI’s Stan Veuger — scholars who are also fans of that Madison quote — documents “the tight link between increased levels of economic and policy uncertainty and unemployment at the state-level during the 2007-2009 recession.”)
While we can’t prove the counterfactual here, it’s reasonable to put a thumb on the scale that ongoing fiscal brinksmanship is probably a net negative. Obviously much better for Washington to reach agreement on pro-growth tax reform and pro-sustainability entitlement reform to both reduce debt and increase incomes.
Let’s not forget, however, that debt is also a kind of tax. Higher debt levels mean future taxes will need to be higher than they would be otherwise. And those higher expected future tax rates reduce incentives to invest today. Giving business, investors, and consumers some certainty that they won’t face a debt crisis or a confiscatory tax burden seems like it might be a good idea. Washington needs to cut its uncertainty tax on America in more ways than one.
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